Before we get too excited, however, let’s ask one quick question: did you just make a plan or a budget? In business, we tend to use the terms “plan” and “budget” as synonyms. But are they? Methinks strongly no.

A budget is a set of numbers that say how much each operating manager (above some level of seniority) is supposed to spend and/or sell in the coming fiscal year. A budget is made by finance and owned by finance. Budgets are often built by trending (i.e., if we want revenue to go up 30%, then to improve profitability, we want expenses to up by only 20%, so give every cost center 20% more than last year, spreading it across time periods in line with historical actuals). Operating managers often perceive budgets as “falling from the sky” — i.e., targets are dropped on them without conversation which makes sense in some perverse way (if the whole thing is a giant trending exercise, then there really isn’t much to discuss anyway). Because budgets are trended, they are often nothing more than “buckets of money” — i.e., marketing is going to spend 20% more than last year on analyst relations, but no one can tell you — and the model certainly does not include — any line-items/details on how it is to be spent. Finally, the seniority-line (mentioned above) is usually quite high in the organization with budgets; only the top functional managers may actually have budgets that they control.

Budgets aren’t evil. We need them. We need targets against which to hold people accountable. We need to be able to forecast cashflows. We need, if we’re public, to set revenue and EPS guidance for Wall Street.

But a budget is not a plan.

A plan is strategic. It starts not with an expense trending exercise, but instead with the company’s position in the market and a strategy for improving it. A high-level strategy is defined. Concrete goals/objectives are identified that support the strategy (e.g., start a European operation and sign 3 distributors). Revenue targets are negotiated, ideally rewarding managers not just for beating the targets (which encourages sand-bagging) but also against more objective and external measures (e.g., market share). Expense targets are set not simply by trending, but also by challenging past expenses and adding the costs of new strategic projects (i.e., stop/continue/start analysis). Budget ownership is pushed down the organization, ideally with every people-manager controlling his/her own budget.

Plans have linked-detail, not just buckets of money. When planning, you say “what do we need to accomplish in analyst relations and what will that cost.” When budgeting, you say “how would we spend an extra 20% in analyst relations.”

The biggest way to tell if you’ve made a plan or a budget is when it comes to cutting time. Budgets are cut with broad, top-down, across-the-board cuts: “look, everyone’s going to need to take 10% more expense out.” Plans are cut by removing strategic objectives: “it looks like we were premature in wanting to open Europe, so I want to see a version of the plan where everyone removes those costs.”

I’d argue that a good plan is more well thought out in every way. Budgets just trend revenue. Plans triangulate using multiple different models with sensitivity analysis. Budgets have TBH1, TBH2, and TBH3 as new hires. Plans have AE/NYC, AE/Boston, and AE/Denver.

In philosophy, budgets are done by pragmatists with a goal to get them done: “it’s imperfect, but you can’t predict the future, and we need something finalized by 12/31.” By contrast, plans are done by strategists in a true attempt to anticipate what can be anticipated about the future.

If you’re going to hire 3 sales teams, they are going to want leads.

If Q2 is usually a rough seasonal quarter, then it’s likely to be one again.

If you’re going to acquire 100 customers, you are going to need to grow your support team.

If you are going to launch a focus on pharma sales, then you will need to develop a pharma sales kit.

If you know a competitor’s strategy and the backgrounds of their executive team, you can anticipate many of their moves (e.g., when Oracle put bankers in charge of the company was it a big surprise that they moved heavily towards an M&A strategy).

If you know industry trends, you can anticipate competitor strategy (e.g., do you think Oracle and SAP will be investing big in cloud in 2014, how about Microsoft and mobile)

So, if you just made a budget, congratulations. You are far better off than many companies who can’t even get that process completed. But beware you’ve got an opportunity ahead of you to make a plan. If you’ve made a plan, congratulations again. While your plan may changes many times as you go forward, the process of planning itself has made your organization more ready than most to respond to those changes. I’ll finish with my favorite quote on planning, by Dwight Eisenhower:

“In the process of preparing for battle I have always found that plans are useless, but planning is indispensable.”

And I don’t think Eisenhower would have considered trended buckets-of-money a plan.

Previously, I was SVP/GM of Service Cloud at Salesforce and CEO at unstructured big data provider MarkLogic. Before that, I was CMO at Business Objects for nearly a decade as we grew from $30M to over $1B. I started my career in technical and product marketing positions at Ingres and Versant.

I love disruption, startups, and Silicon Valley and have had the pleasure of working in varied capacities with companies including Breeze, GainSight, MongoDB, and Tableau. I currently sit on the boards of Alation (data catalogs) and Nuxeo (content management) and previously sat on the boards of agtech leader Granular (acquired by DuPont for $300M) and big data leader Aster Data (acquired by Teradata for $325M).

I periodically speak to strategy and entrepreneurship classes at the Haas School of Business (UC Berkeley) and Hautes Études Commerciales de Paris (HEC).

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This blog is written by Dave Kellogg and covers a mix of topics including performance management, analytics, big data, and social technologies along with commentary on Silicon Valley, venture capital, and the business of software.